The Train Keeps Rolling

Despite the slowdown, consolidation continues.

We have a great old passenger train based here in New Orleans called the Sunset Limited. In the 1950s and 60s, it was synonymous with pure luxury, ferrying its well-dressed pasengers from here to Los Angeles before air travel overtook passenger trains as the most efficient means of transportation.

In recent years, I have coined my own term for what I see in this industry. I call it the Consolidation Limited, forcing gates down at every crossing and blasting its horn loudly.

I have written twice on the consolidation wave. Given the dramatic turn-for-the worse, I wondered if the speed of the Consolidation Limited was starting to slow. Looking at the activity so far in 2008, it looks like the answer is a resounding “No.”

Look at just a few of the recent, large-scale transactions: the Rinker sale to Cemex, Hanson was sold to Heidelberg, and Florida Rock went to Vulcan. But the wave hasn't been limited to the major public multinationals. Just this year, the two largest, privately held producers have also changed hands: Prairie of Chicago sold to Votorantim, and Robertson's in Los Angeles sold out to Mitsubishi Cement, its minority partner, in two record transactions.

The exit from this industry in the last several months by the private equity crowd indicates that the strategic buyers remain bullish for the long term. Audax sold its holdings in the Carolinas and Las Vegas to Cementos Argos and Cal Portland Cement, respectively. Texas Growth Fund sold its Texas operations, again to Argos, and Park Avenue Partners sold Meyer Materials to Aggregate Industries.

Only two or three private ready-mixed concrete producers remain in the hands of private equity groups for now, as they take a pause in their appetite for this space as a result of the current downturn.

In the fall of 2005, I wrote that independent producers thinking about selling “are most often motivated by succession issues, estate planning, diverse interests on the part of family members and/or partners, and a concentration of their net worth in the business. But in addition to those reasons, these motivations are always coupled with a concern about what the future holds for the independent producer, and whether their family business or long-standing partnership will go the way of the corner grocery store, the corner drugstore, and the corner hardware store.”

Reasons for selling

Well, that certainly hasn't changed. But there are now some key new motivators in addition to those above, and we hear them often these days:

Concerns about reliable materials availability have expanded beyond cement. In some markets, the cost of coarse and fine aggregates has exceeded the cost of cement in a yard of concrete for many producers. Past concerns about a reliable supply of cement in good times from the handful of multi-nationals that dominate the U.S. market has expanded to aggregates in many markets, and will undoubtedly grow in years to come.

Many independents who were enamored with the high profits of the last few years realize they may have missed the top of the market. But they don't want to slug through the next couple of years, and then spend four or five more to rebuild their volumes and profitability to the historical highs of 2005. We continue to hear the same theme: “Just get me out.”

On the buy side, there has been a sea change among the cement players in their motivations to consolidate their downstream distribution and secure their materials flow into the future.